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March 16, 2009

Increasing Our Economic Bandwidth?

Brian Belardi
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With the economy sputtering, many are looking to a government-funded expansion of our broadband networks to spur a recovery. The recently-passed economic stimulus package allocated $7.2 billion for projects to expand broadband, including bringing service into rural areas. But will increasing our nation’s Internet connectivity create jobs and promote economic growth?

Yes and no, says Raul Katz, adjunct senior research scholar in finance and economics and the director of business strategy research for the Columbia Institute for Tele-Information (CITI). Katz recently spoke about the impact of the expansion at a conference cosponsored by CITI and Georgetown’s McDonough School of Business.

He says that while physically expanding the networks will undoubtedly create jobs, “the most difficult part is determining the jobs that will be generated as a result of network externalities (e.g. the innovation effect, the productivity impact). The research in this area is very embryonic.”

Katz also cautions those looking for a quick pop in economic growth.

“Economists have determined that in order to profit from information and communication technologies, firms have to modify their production processes and organization to adapt them to the new technology,” he says. Katz estimates the timetable for changes in business processes, training and exploration of new applications to be two to three years.

Additionally, Katz says that people receiving broadband access by way of the expansion might be less likely to take advantage of the technology’s benefits than earlier adopters.

And just as the expansion may create new jobs, it will destroy others. New technologies focused on efficiency often leave some professions obsolete. A New York Times article on the subject refers to this as the “John Henry Effect.”

“Productivity enhancement that is not compensated by business expansion necessarily has to lead to job destruction,” says Katz. “If new services/businesses are not developed by firms having a productivity dividend out of broadband, jobs will be eliminated.” The sector most likely to be affected by this trend, Katz says, are professional services, which are information intensive.

There’s also the risk of increased outsourcing, which Katz’s research (PDF) suggests is a likely result of the expansion.

Katz recommends that the following steps be taken to ensure that the U.S. gets the most bang for its broadband buck:

  • Provide incentives to companies likely to outsource services to help keep jobs in the region
  • Enact job creation programs that include relocation of businesses in the areas where broadband is deployed
  • Promote business innovation that can lead to the creation of new services by the firms benefiting from broadband-induced productivity effects
  • Train the workforce and entrepreneurs take advantage of the newly deployed broadband infrastructure